The greatest contributor to the electricity cost increase over the last few years has been the higher wholesale electricity cost which reached record levels in 2022. Whilst it has since dropped significantly, the wholesale cost is still ≈ 10p/kWh higher than it was four years ago. In addition, the UK power price has been driven up by higher European gas prices because we need gas to produce ≈ 40% of our electricity and even though it’s only 40%, gas sets the price of UK power. Gas prices remain inflated because the UK and Europe have lost their cheap supplies from Russian pipelines, exacerbated by the war in Ukraine. On the plus side these are fully transparent, but they are also non-negotiable.
That said, they are the place you can influence most. You can’t negotiate these costs but you can choose to spread them and benefit from future purchasing. All you need is some good, trustworthy advice so you can make an informed decision. For example, smaller customers should discuss energy prices with their energy advisor and pick the best time to fix rather than waiting until their contract is about to end. For larger customers, who likely started buying in the wholesale market twenty years ago, this is the time to start to really manage energy price volatility by questioning the static approach of the past and adopting a newer dynamic approach.
Then we have what we call ‘the negotiable costs.’
This second contributor to the electricity cost increase is the least transparent and we have estimated they have risen by ≈ 2p/kWh but for specific customers the increase could be significantly more. These include things like the Supplier’s margin, cost risk premium and credit risk premium which are never disclosed, but we know that they rising because we can subtract all the costs that we know about, and what’s left in the customer’s quotation is the supplier’s margin.
There are a number of reasons for this rise. For example, some large suppliers (such as Scottish Power and British Gas) have exited the industrial and commercial market so there is less competition. Other suppliers are refusing to quote if they have concerns about the credit worthiness of the customer and/or their sector.
As a result, suppliers are sending fewer quotes to customers’ or brokers’ tenders compared with four years ago. Finally, when suppliers offer fixed prices for, say, one or two years they try to predict what those costs might be and also predict the customer’s exact volume. As these costs become less predictable in 2022, suppliers have increased their risk premia within their price.
Where organisations use a Broker, in far too many cases their commissions are not disclosed meaning then the broker may be tempted to keep the same percentage commission, despite the rising prices, resulting in a pence per kWh increase or they may even increase the percentage commission to maximise their profits.
When it comes to these ‘negotiable charges’ – the easiest way to reduce your costs is to ask your energy broker to disclose their fees or commission before they act for you and then negotiate them if you are not happy. Never give them authority to sign supply contracts on your behalf as this opens the door to costs being artificially inflated and fees being hidden. Confirm their actual commission with the energy supplier as not every supplier shows commission in the supply contract.
Keep an eye on the cost of renewable energy being offered by suppliers which traditionally cost a tiny amount more than “brown” energy. As demand for “green” electricity has increased faster than the supply of “green” power, the generators have been able to attract a premium for the “green certificates.” For the customers, this can mean paying as much as 1p/kWh extra for renewable electricity. Clearly there
are other considerations about the decision around renewable energy such as ESG commitment and carbon reduction targets.
Finally, “Shape” costs that are incurred by suppliers to buy the exact number of extra kWh that the customer needs at the peak times of the day have increased. Often this peak power must be bought from a shrinking number of old fossil-fuel stations that generate when customers’ demand peaks.
And lastly, to the Regulated Monopoly that is all about covering its costs, the third contributor to the electricity cost increase is the “network and balancing charges” levied by the National Grid and the local network companies which are ≈2p/kWh higher than the total four years ago. Networks charges are adjusted for inflation and the cost of network expansion. Furthermore, electricity demand has fallen by 20% since the peak in 2005 which means the networks’ costs have to be recovered from fewer kWh, pushing up prices.
In addition, two specific changes occurred on 1 April 2023: OFGEM, the Regulator, said customers would have to:
1. pay 100% of National Grid’s balancing bill; in the past the cost was shared equally with the generators. This change came on top of a huge increase in the total cost of balancing as National Grid paid fossil-fuel stations to keep-the-lights-on in the hours when wind and solar power weren’t available.
2. pay “banded” National Grid transmission charges instead of the traditional “triad” charges. This change means standing charges rise although overall, some customers will pay more and others will pay less than they did in 2022.
The good news is that potentially there is a quick win here that you can discuss with your energy consultant about whether you paying for more electricity capacity than you need. If so, you can reduce your “per kVA” charge immediately, however you can only reduce your “banded” charge in exceptional circumstances so you may have to wait until April 2026 to see a lower “banded” charge.
To reduce your costs your energy consultant should advise you on timing, competitively tender your business to drive down the negotiable charges and reduce your network charges if possible. They should charge you a fair and transparent fee for these services.